Galleon's Rajaratnam strikes back, calls SEC tactics unconstitutional

Billionaire hedge fund manager Raj Rajaratnam had vowed to fight the insider trading charges against him with the same vigor he used to amass his fortune. And now his army of seasoned lawyers is swinging back hard against allegations that the founder of the Galleon Group engaged in insider trading in stocks ranging from Google (GOOG) to Hilton (HLNQ).

On Tuesday, Rajaratnam's legal team responded to the SEC's allegations by attempting to systematically dismantle the case made against their client. Not only were the methods used to snare Rajaratnam unconstitutional, the response contends, but the information allegedly given to Rajaratnam was already widely known, and it may be difficult to prove he traded on it rather than on his broader analysis of the stocks.
While prosecutors had played up the use of wiretaps in the Galleon investigation – such methods were previously reserved for going after mafia bosses – Rajaratnam's camp argues that their use violated his constitutional rights. "Under Title III, electronic surveillance is permitted only when necessary for the investigation of specified crimes and only when alternative investigative procedures have been tried or appear unlikely to succeed."

Credibility Problem Surrounds Star Witness

Rajaratnam's lawyers also took aim at the credibility of Roomy Khan, a former Galleon and Intel employee and a key witness in the prosecution's case. After petitioning to have Khan's prior conviction of wire fraud made public, the defense claimed that prosecutors had made "materially false statements" to gain permission to wiretap. Prosecutors had told the court that Khan "had 'not yet been charged with any crimes,' when in truth and in fact, Khan had been convicted of wire fraud in the United States District Court for the Northern District of California in 2001." The defense also claims that Khan fabricated evidence in a civil case in federal court "further calling her credibility and reliability into question."

And any tips Rajaratnam might have received were about information widely known and in sync with the analysis Galleon had already conducted about the stocks. "Galleon pursued a strategy that was in place before the alleged inside information" and Rajaratnam's "subsequent securities transactions were consistent with those positions and strategies," the defense argued.

Reeling from the embarrassment of missing the $60 billion Bernie Madoff scam, government officials seemed poised for a high-profile prosecution that included press conferences and a televised morning arrest. But failing to convict Rajaratnam despite a mountain of evidence could result in yet another black eye for the SEC.